Jakks Execs Get Earful After Profit Falls Sharply

The toy maker drops a bombshell after a June sale of convertible notes. The firm's stock sinks.

Toy maker Jakks Pacific Inc. stunned investors Tuesday with dramatically lower-than-expected profit in the second quarter, prompting an analysts' free-for-all on a conference call with company executives.

One analyst called the quarter a "train wreck." Another said, "I think train wreck is putting it mildly."

Jakks' net income plummeted 60% in the quarter, which the company blamed on bad weather that quelled demand for summer toys and on severe acute respiratory syndrome, or SARS, which it said hampered production in China.

Net income was $3.2 million, or 13 cents a share, down from $7.8 million, or 36 cents, a year ago. Sales fell 7%, to $73.3 million, from $79 million.

In after-hours trading, shares of Malibu-based Jakks fell to $10.60, down 17% from their closing price of $12.69 on Nasdaq.

Best known for its World Wrestling Entertainment action figures and Flying Colors craft and activity kits, Jakks lowered its earnings estimate for this year, predicting profit of $1.30 to $1.35 a share, excluding one-time costs.

An average of analysts' forecasts, as surveyed by Thomson Financial, was $1.66 per share.

"We're trying to give a number that we can't miss and hope to do better," said Chairman and Chief Executive Jack Friedman. "Individual lines are doing well in a sluggish environment, without any specific drivers -- we think that is pretty good."

Among the strong performers is Tongue Tape, a candy line based on adult breath-freshening strips, the company said.

During the conference call, held after the market closed, analysts peppered Friedman with questions about why the company hadn't warned that the quarter would be lousy.

Jakks in June finalized the sale of $98 million of convertible notes, which the company said it needed to finance potential acquisitions.

It made no mention at the time of any problems with second-quarter earnings.

On the conference call, Friedman said the company only recently learned that weather and SARS had so negatively affected sales.

He said that if Jakks had known at the time of the sale of the notes that second-quarter profit would be so slim, the company would have warned Wall Street.

Jakks has become the nation's third-largest toy company mostly through aggressive acquisitions financed with cash and stock. Last year, the company faced complaints from investors when, after raising money in a secondary offering to buy Toymax International, it lowered its revenue guidance by $50 million.

"Investors will probably look at this and be very upset," said Sean McGowan, a longtime toy industry analyst with Harris Nesbitt Gerard in New York, in an interview following the conference call. "There was no indication -- from a company in the middle of an offering -- that there were problems. And the problems being cited were industry-wide and present most of the second quarter: Weak retail demand, poor weather and SARS. This didn't just pop up."

Analysts also noted that Jakks' larger competitors, Mattel Inc. and Hasbro Inc., pointed to none of the problems identified by Jakks, despite facing the same colder-than-average weather this spring and producing far greater numbers of toys in China than Jakks. Mattel and Hasbro reported earnings gains for the period, though Mattel suffered weaker sales, citing the difficult retail environment.

"Did they do the convertible knowing about this weakness or not?" asked Arvind Bhatia, of Southwest Securities in Dallas. "I think you have to question everything now. You have to question whether they can make their annual numbers.